Review finds ex-SEC watchdog may have had conflicts of interest

Friday, 5 Oct 2012 | 7:09 PM ET

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WASHINGTON, Oct 5 (Reuters) - A former U.S. Securities and Exchange Commission inspector general who left amid months of turmoil at his office may have had conflicts of interest surrounding several key investigations under his watch, according to a watchdog report.

Ex-Inspector General David Kotz was friends with people close to his investigations related to two high-profile Ponzi schemes, and he had a flirtatious relationship with an SEC employee who was involved in another project involving Kotz's office, according to the report.

The report was written by the U.S. Postal Service Office of Inspector General at the request of the SEC. It did not identify specific instances where information in an SEC inspector general report was compromised.

"The report reveals poor judgment by several top employees, including the former inspector general himself," said U.S. Senator Chuck Grassley, a Republican who has been following the situation at the SEC. He also said the integrity of the investigations did not appear to be impacted.

Kotz did not have an immediate comment on the report.

The chief investigator in the SEC's inspector general office, David Weber, made the allegations of misconduct against Kotz. The SEC asked the postal inspector general to look into those claims, as well as separate allegations that Weber created a hostile work environment with behavior that made employees feel threatened.

The investigation did not substantiate allegations that Weber created a hostile work environment. Weber could not be reached for comment.

The SEC inspector general's office is charged with rooting out waste, fraud and abuse at the agency. It has investigated the SEC's failure to catch convicted Ponzi schemer Bernard Madoff, the agency's oversight of Wall Street during the financial crisis, and other high-profile issues.

But the recent drama has left the office in disarray. Kotz, who started as inspector general in 2007, developed a reputation as a tough watchdog, but his tactics led some staff to claim he created a culture of fear at the agency.

After Kotz left the agency, Weber went to SEC officials and a government council that monitors inspectors general with allegations that Kotz had engaged in inappropriate conduct.

SEC spokesman John Nester said the agency had believed the allegations merited an independent review and it appreciated the Postal Service OIG report.

The report, which was obtained by Reuters through a Freedom of Information Act request, said that during Kotz's investigation of issues related to the SEC-appointed receiver responsible for recovering funds from a Ponzi scheme run by Allen Stanford, Kotz had a personal relationship with Gaytri Kachroo, an attorney for Stanford's victims who were unhappy with the receiver's work.

Kachroo said in a statement on Friday that she understood that the Stanford receivership investigation was prompted by numerous complaints by others. She also said her firm sent a formal letter on behalf of hundreds of victims who have no relationship with Kotz.

Kotz, the report said, also was a "very good friend" of Harry Markopolos, the financial investigator who tried to alert the SEC about Madoff's Ponzi scheme. The report said if the friendship began before or during the OIG's Madoff review, that would have been inappropriate, but it could not establish when it began.

Markopolos could not immediately be reached for comment.

The report also said Kotz exchanged flirtatious emails with an SEC employee, whose name was redacted, while his office reviewed an SEC program the employee worked on. Investigators found no evidence that Kotz interfered in that review as a result of the relationship.

"However, Kotz should have recused himself to assure that conflicts of interest did not manifest themselves," the report said.

Weber, who raised the concerns about Kotz, was placed on leave in May after he reportedly talked about wanting to carry a concealed firearm and brought a bullet-proof vest to work.

Employees said they felt physically threatened by him and accused him of creating a hostile work environment, according to the USPS inspector general's report.

Weber said at the time that the complaints were retaliation against him for reporting concerns about Kotz. The investigation did not assess Weber's suitability to return to work, the report said.